After the inflation shock, here comes the war in Ukraine. In the energy sectors, the two are clearly linked. Oil is reaching price levels not seen for a long time, and gas is even hitting new all-time highs. At the beginning of March, the megawatt-hour of gas in the Dutch TTF futures contract broke the EUR 200 mark. The 118.1 dollars for a barrel of Brent crude oil is a level not seen for ten years. Fossil fuel prices have become a barometer of dependence on Russia and supply concerns. Germany and Italy in particular are looking for alternatives to Russian gas. Talks are underway to increase quantities from Africa, and additional capacity is being created for liquefied natural gas (LNG).
Other commodities, notably wheat, for which Russia and Ukraine account for 30% of world production, have also set new record prices. There are fears of supply disruptions for key materials, for example for the production of semi-conductors.
Inflation at new record highs
The sharp rise in prices is also fuelling inflation, which was already at high levels. Fears of stagflation – a slowdown in growth accompanied by rising prices – are palpable. In the euro area, inflation in February is estimated at 5.8%, compared with 5.1% the previous month. This is a new record, far from the ECB’s medium-term objective of 2%. The US is less exposed geographically to the war in Ukraine and is not a net importer of energy. But inflation in the US is also expected to hit a new high in February, at 7.9% (7.5% in January). Demand has remained strong, keeping pressure on the supply chain and on wages. The rise in WTI crude oil, the benchmark for the US, is not much less than that of Brent crude.
Central banks face tough choices
Despite inflation not weakening, on the contrary, expectations for central banks have become more modest. Before the Russian attack, the consensus was for a 50 basis point (bp) Fed Funds rate hike in March. From now on, also after transparent statements by Fed Chairman Jerome Powell, this increase is expected to be 25 bp. As for the ECB, it has not broached the subject since the start of the war in Ukraine. But the markets have become more cautious about a first hike in 2022. The euro fell back below the $1.10 mark. According to economist Nouriel Roubini, central banks face a stark choice: a slower-than-expected tightening will fuel inflation, but a tighter monetary policy will worsen a potential recession.
In addition, the consequences of the exclusions of Russian banks from the Swift interbank system are still uncertain. While the immediate impact will be felt in Russia, the repercussions on the creditworthiness of companies and other trading partners may also affect Europe. This also applies to the closure of the Moscow stock exchange at the end of February.
Growth forecasts revised downwards
Growth forecasts for 2022 are already being revised downwards. According to Scope Ratings, the consequences are particularly significant for Germany, whose growth for this year is expected to be 3.5%, instead of the previous 4.4%. Its automotive industry is expected to suffer particularly from Russian and Ukrainian component manufacturers, but also from higher export costs to China. France (4.2%) and the UK (4.6%) should be able to better maintain their momentum. The IMF and the World Bank are still assessing the consequences for global growth. Higher oil prices could cost the US half a percentage point of growth, according to estimates by Fed President Jerome Powell.
Positive mood at the beginning of the month
The PMI indices show that the mood before the outbreak of war would have been positive. In the US, the index for industry rose in February by 1.8 points to 57.3. The services index even jumped by 5.3 points to 56.5 points. Even in Europe, the score rose by 4.4 points to 55.5. European industry had not yet taken the war into account either (58.7 points, -0.5 points).
